Benefits time bomb ticking for UK Conservatives

Britain's Chancellor of the Exchequer George Osborne (C) laughs with Treasury Secretary Danny Alexander (L) and Prime Minister David Cameron after delivering his autumn budget in parliament in London December 5, 2012. REUTERS/UK Parliament

LONDON (Reuters) - The last thing a British Conservative government wants in an election year is a rise in taxes for the middle class, yet that appears to be what Finance Minister George Osborne will deliver in his drive to cut costs.

By the time the country votes for a new parliament in May 2015, many better off families may have been claiming benefits they are no longer entitled to for more than a year. The money will be recouped via their taxes, leaving many with hefty bills.

A disproportionately large number of those will be in the battleground southern England constituencies the Conservatives need to retain or win to stay in power.

More than 800,000 households failed to declare that they are over a new income threshold for child benefit, previously paid to all parents to help with the cost of raising a family, by a Jan 7 deadline.

Angry discussions of the government’s move -- part of a wider crackdown on spending to rein in Britain’s debts -- have prompted thousands of posts on community websites like south London’s East Dulwich Forum. (www.eastdulwichforum.co.uk)

“I missed the deadline but I‘m pulling out now,” says Jo Smith, a mother of two in the south London suburb of Eltham, which the Conservatives could win with a 2 percent swing from the opposition compared to 2010.

“I don’t want to be faced with a 2,000 pound ($3,000) tax bill that I’d have to pay immediately. If it happened today I don’t know how we’d pay.”

In a scything back of welfare that is among the toughest since World War Two, Osborne has pointed to the child benefit move as evidence he is focusing it where it is needed most.

But Londoners struggling with far higher costs of accommodation and transport than elsewhere in the country argue the 50,000 pound ($78,500) threshold for annual earnings means thousands of households in the city and surrounding commuter belt will lose income that is anything but disposable.

Jo’s husband earns just above the 60,000 pound ($94,500) per year limit beyond which no benefit at all is paid.

That places them in the top 13 percent of earners nationally according to the Institute for Fiscal Studies, but they are further down the income scale in London, where as many as a third of households top the threshold in some districts.

“I‘m originally from Manchester and up there I don’t think I’d feel it as much, but down here 60,000 is nothing,” she says. “The cost of living in London is horrendous and it just keeps rising.”

GO EASY

While Britain’s political mainstream is largely agreed on the need to cut spending, this year’s round of cuts will be the first time it has so directly hit the income of the working families the government must court to stay in power.

The main opposition Labour party has accused Osborne of cutting too hard and too fast - backed by warnings from the International Monetary Fund and other economists that some of the plan should be put on hold while growth recovers.

“I don’t think it’s right what they’re doing,” said Hanna Lundberg, walking around the huge Lakeside shopping centre with her kids in working class Thurrock on London’s eastern edge.

“It does not seem like they want to support young families. This money is for the children and should not be taken away.”

Thurrock was the third closest head-to-head result between the Conservatives and Labour in the 2010 election and one of almost 50 swing constituencies spread across the south of the country which Prime Minister David Cameron would need to win.

Already trailing by around 10 points in the polls, the Conservatives traditionally struggle in the north of England and have only one Westminster MP in Scotland, meaning the south is where UK elections are generally won.

The IFS says proportionately more of the households losing child benefit will be in the south and a number of Cameron and Osborne’s critics on the right have said mainly Conservative voters will be hit.

“We have got an unexploded political bomb with a long fuse which will blow up immediately before the general election,” Conservative MP Christopher Chope told the right-leaning Daily Telegraph newspaper earlier this month.

“It is going to make it much more difficult in the Conservative marginal seats which we are defending.”

COMING UP SHORT

Like many of the European states cutting public spending, Britain is finding that Osborne’s plan is not working as well as hoped.

Some Conservative MPs made much of a return to growth in the third quarter but a dip again in numbers for the end of the year underlined that the economy has done consistently worse than the government expected since 2010. That has forced it to push back its deficit reduction targets and prompted expectations it will lose its prized triple-A credit rating later this year.

While officials blame the euro zone crisis, Jonathan Portes, head of the NIESR think tank and a high-profile Osborne critic, says the government underestimated the impact of fiscal cuts at a time when official interest rates could not go any lower and the pound was not guaranteed to fall.

He says measures including a broad 1-percent fall in real terms for all welfare benefits in April will have at least twice the impact on the economy predicted by official forecasts.

“After something of a lull in the austerity, it is clear that now we are getting back on the job,” Portes says.

“There will be a much broader hit to real household incomes this April when benefits are uprated by less than inflation. That will have a much larger impact on growth than the government expects.”

The IFS puts the average loss of income from the child benefit move alone at 1,300 pounds for each of some 1.1 million households across the UK. That adds up to more than 13 billion pounds that will not be spent by the households concerned.

Only 270,000 households who will lose their right to the payments opted out by January 7 and accountants warn that, despite more cancellations since, many may still be on the roll in 2015.

“It is some teachers, some better paid managers and professional people. It is reasonably lucky ordinary people with good jobs, but without doubt ordinary people,” says Anita Monteith, a tax manager at the Institute of Chartered Accountants.

“Especially in the south-east, you could be paying this back when it is not the sort of money you can lay your hands on.” ($1 = 0.6367 British pounds)

Additional reporting by David Milliken and Costas Pitas; editing by Philippa Fletcher